Liquidity Surplus: Interest rates of deposit collection increasing in each auction

ShareSansar, September 26:

The interest rates of the deposit auctions held by Nepal Rastra Bank (NRB) are going up each time which indicates the stiff competition among the banks and financial institutions (BFIs) to park their excessive liquidity at the central bank.

Deposit auction is an instrument introduced by the central regulatory bank to collect the deposits from the BFIs directly through the bidding process. Interest rates are fixed through the auction.

This new instrument of the open market operation was introduced by the central bank to address the liquidity surplus seen in the banking system for past few months.

While the interest rate of the first deposit auction held for Rs 20 arba was fixed at 0.6911 percent, the rate rose to 0.585 percent in the second auction held for Rs 10 arba within a gap of month.
The interest rate increased to 0.7488 percent in the third auction held last Tuesday for the deposit of Rs 10 arba. The highest interest rated was quoted at 0.99 percent and lowest of 0.435 percent in the last auction.

The central bank has already absorbed Rs 40 arba from the banking system through this new instrument which has a maturity period of 90 days.

Though the interest rate surged in the last auction, the number of BFIs participating in the auction declined. The last auction drew 120 bids from 21 BFIs while the previous auction has drawn 209 bids from 31 BFIs. The first auction had drawn 225 bids from 35 BFIs.

According to the NRB, the liquidity surplus now stands at Rs 13 arba in the banking system. The NRB officials say that they will now consider issuing another auction only after assessing the liquidity situation of the banks.